Mark: So with our clients that are embarking upon a sell side M&A process, they often want a gut check or a viewpoint on what valuation to expect. What are some of the ways that we've seen buyers put forth and establish a valuation for a given opportunity?
Ramy: Yeah, for early-stage companies, it's typically less geared towards financial metrics like revenue-based or EBITDA-based purchase prices, as it is, how much is a buyer willing to pay for this company? A lot of times, the thought process is how much is it going to take for us to develop this technology in-house versus buy it from this company?
Mark: I also often find that it's not so much what is the commercialization at this point in time, but what is the potential on a more mature buyer's established platform to commercialize that technology that can extract a higher valuation?
If there is a significant gap between a seller's selling price and a buyer's buying price, what are some of the terms or structures that can be contemplated to bridge that gap?
Ramy: Yeah, I think of two things. One is stock consideration. Often buyers will offer stock in addition to cash to try to bridge that gap, and that could be public company stock or private company stock. Another way is a contingent consideration called an earn-out, which would be based on a milestone or it could be revenue-based earn-out that the sellers would earn over time.
Mark: One other way to maximize value is oftentimes creating competitive leverage. Sometimes it's real competition in terms of multiple parties being brought to the table. Sometimes it's feigned leverage in competition, but the more that you can create doubt in a buyer's mind about whether they will win the opportunity, the more leverage you have in extracting value.